Crude Reality

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Chevron announced today that it planned to restructure its money losing refinery operations to bring costs in line with profitable operations. During the last quarter of 2009, Chevron’s refining business lost a staggering $600,000 per day according to Deutsche Bank. And it was not alone, other refiners are also underwater in this most difficult of the big oil sectors. Is it little wonder why we have not seen a new refinery built in the US since 1976.

Only a few months ago we were all cussing big oil for skyrocketing gasoline prices, and indeed for a while the sector made profits. But the boom and bust character of this business often seems to defy logic as supply and demand responds to market realities.

Up the road from my home in the San Francisco Bay area is Chevron’s 100 year old Richmond, California refinery. When prices were high Chevron proposed upgrading the facility to enable it to process a wider variety of crude oils from sources around the world. All the required environmental impact studies were done revealing that the upgraded plant would improve refinery efficiency and economics while adding operating flexibility to process a wider variety of crude oils.

Not so fast said, the environmental intervener EarthJustice which filed suit in state court to force Chevron to demonstrate that processing heavier crude oil types at the upgraded plant would not harm the environment. This is the legal equivalent of the “when did you stop beating your wife” question. While this lower court decision requiring more studies is more likely than not to be overturned on appeal, it had the effect to delaying any improvements at the Richmond refinery perhaps for years.

Yesterday, the economic consequences of that delay fell upon Richmond like a major oil spill. The Richmond City Council, egged on by local environmental constituencies, had urged more studies as a strategy to press for more tax revenue out of Chevron to remove its objections. The company just said “NO!”

Chevron said it is now more likely than not to sell or close the Richmond refinery eliminating 1200 well paying jobs and millions of dollars of tax revenue and income recycling throughout the East Bay area economy.

The crude reality is the fastest way to improve refinery profits today is to close excess capacity around the world at a time when demand is down and invest in facilities that can operate more flexibly in the future as demand recovers by processing crude from many sources to make products of many types.

So what?

So the customary environmental strategy of using the courts to impose delay in hope of negotiating concessions just backfired on Richmond, California. Instead of adding more good paying jobs and seeing tax revenue grow, Richmond will need to call in the redevelopment agency.

Perhaps, Chevron can unload this white elephant on the Chinese or some other investor, who knows. One thing seems certain the new owner is not likely to be as civic minded as the folks from down the road at Chevron who gave up after a 100 years. There must be a California solution to this problem—maybe Richmond can collect all the French fry oil and turn it into unleaded!